O or OHI: which REIT to buy?

[DividendDream]

See my blogpost here at http://dividenddream.blogspot.nl/.

I am planning to make a purchase next week. Since I currently don't have any REIT exposure in my stock portfolio, I would like to add some using fresh capital. Especially considering the recent correction in stock prices due to worries about tapering and rising interest rates, this might be a good time to start a position.

Real Estate Investment Trusts
The REIT universe is quite but but I narrowed it down. I am considering two companies at the moment: Realty Income (O) and Omega Healthcare Investors (OHI). Although these companies are active in a different segment, their business is more or less the same. Realty Income is an equity real estate investment trust (REIT). O is engaged in acquiring and owning freestanding retail and other properties that generate rental revenue under long-term lease agreements (primarily 10 to 20 years). Omega is also a REIT, investing in income-producing healthcare facilities, such as long-term care facilities located throughout the United States. OHI provides lease or mortgage financing to operators of skilled nursing facilities (SNFs) and, to assisted living facilities (ALFs), independent living facilities and rehabilitation and acute care facilities. The business model of both companies is to raise capital through debt and equity and to invest this money in real estate in their respective segments. Through long-term leases capital is returned to shareholders via dividends and hopefully capital gains.

Dividend comparison
In terms of dividend yield OHI wins. OHI currently yields 6.4% (paid quarterly), O yields 5.6% (paid monthly). OHI also shows a higher dividend growth rate. OHI's 5yr DGR is 8.9%, O's is only 3.2%. O's record of dividend payments (and regular increases) is longer than OHI. It seems that based on these metrics OHI is a better choice.

Valuation
But what about valuation? It is one thing to buy a great company, it's another one to buy these companies at good prices. How do O and OHI stack up against each other? A widely used metric for valuation purposes in the REIT sector is the adjusted funds from operations (AFFO) per share, relative to the stockprice. Based on the first three quarters in 2013, O's price/AFFO is 16.3x, OHI's is 13.3x. It seems OHI is cheaper than O. Although based on the 52-week high and low range, O has far more upside potential (+42%) than downside potential (6%) than O's (28% upside, 32% downside).

Whick stock to buy, O or OHI?
Both are obviously great companies and would do fine as part of my portfolio. What would you recommend me to buy? O, OHI, none or maybe some other company in the REIT sector? I am curious to hear from other DGI'ers if they think the time is right to add either one of these companies to their portfolio.

[TomK]

I'm just starting my exploration of conservative REITs as well, and both of these seem highly regarded. So the obvious question to you is: why not some of both?

[EricL]

What are your investment goals and at what stage in investing are you?

O is a blue chip, lower risk, likely slower growing REIT that will provide reliable dividend payments. If you are nearing retirement and need reliable income it is probably the safer choice.

OHI is a slightly higher credit risk and is in a potentially more volatile industry than O (Obamacare?) that provides the potential for higher dividend growth and capital gains. If you are in the accumulation stage and are looking for a chance at greater capital appreciation it may be the better choice.

Personally, I own both companies and am reinvesting dividends received. I like the stability of O as a core asset with an above average yield and like the higher growth rate of OHI. I have 20+ years to retirement and think in the long run both will give me decent returns.

[hendi_alex]

I have not looked at the details of either one of these tickers, so could easily be off base. But my impression leads me to be curious as to the characterization of these two REITs as being 'blue chip' or 'lower risk' as compared to the REIT world in general. Just a glance at their current yields as well as their yield over the past year should scream 'higher risk REIT'. Also the volatility of OHI should raise a big red flag. I'm not saying that these REITs don't represent interesting investments, and as posted elsewhere, I own shares of O. But they are not likely in the same league as the likes of SPG, PSA, PLD or any of the lower yielding REITs.

[NilesMike]

Are any of you that own REITs with significant retail space exposure concerned about retail's struggles going forward.

Are brick and mortar retailers going to thrive in an e-commerce world?

The only REIT exposure I've had (none currently) is VNQ fund.

[rnsmth]

I own both.

[Kerim]

I bought my first slug of O a few days ago, at about $37.20. If it drifts up from here, I'll sit tight. If it drifts lower into the mid-30s, I'll average down. I feel like O is more straightforward and understandable than OHI, for the reasons others have pointed out above.

[NilesMike]

(12-17-2013, 07:02 PM)hendi_alex Wrote: I have not looked at the details of either one of these tickers, so could easily be off base. But my impression leads me to be curious as to the characterization of these two REITs as being 'blue chip' or 'lower risk' as compared to the REIT world in general. Just a glance at their current yields as well as their yield over the past year should scream 'higher risk REIT'. Also the volatility of OHI should raise a big red flag. I'm not saying that these REITs don't represent interesting investments, and as posted elsewhere, I own shares of O. But they are not likely in the same league as the likes of SPG, PSA, PLD or any of the lower yielding REITs.

Not sure if PLD belongs in that team photo.

[ronn38]

I own both as well, but having about a 15-20 horizon I chose OHI first ( for the reasons EricL pointed out.) I only bought O when the price became attractive. I don't know the amount you considering investing - nor do I need to -- but unless its quite modest, and if your comfortable with the current valuation, I'd start a position in both.

Ronn

[DividendDream]

Thanks for all of your replies. I am just starting my dividend growth portfolio (I am 30yrs old) so that suggests stocks with higher growth rate are better in the long-term.

I also think that demographic trends are in favor of OHI compared to O. More older people, Obamacare, higher life expectancy, etc.

On the other hand, O is a more established company. It has a longer dividend streak than OHI.

I am leaning towards a healthy chunk of OHI at the moment. I could start a position in both. I am looking to buy for roughly 1500 EUR, ($2000) which means I would incur 0,7% costs if I start a position in both. If I just open a position in either one I would incur 0,45% costs. It's a difference of $5

[TomK]

Why is O getting killed today? I see that it is a bad day for REITs generally, but O is down way more than most, almost 4.5% down. I don't see any headlines that would seem to explain it. Anybody know?

[hendi_alex]

Gradual changing of fed direction and specter of increased borrowing costs. They have had a free ride with the wind at their backs for many years now. It will be hard to out perform when facing head winds. REITs probably have a lot of downward correcting to do. At the least I would expect average yields for the group to hit closer to 7% than the current average that is not much over 4%. I would also suspect that the current higher yielding REITs are likely giving those higher yields because they face greater interest rate risk than is the case with the more conservative plays in the space.